New Zealand Commercial Service Exporters

Transcription

1 New Zealand Commercial Service Exporters First Evidence from the Prototype Longitudinal Business Database June 2010 MINISTRY OF FOREIGN AFFAIRS AND TRADE ECONOMIC DIVISION i

2 AUTHORS Menaka Saravanaperumal Specialist Economist, Economic Division Ministry of Foreign Affairs and Trade PO Box Wellington New Zealand Telephone: Facsimile: Gus Charteris Deputy Director, Economic Division Ministry of Foreign Affairs and Trade PO Box Wellington New Zealand Telephone: Facsimile: DISCLAIMER The opinions, findings, recommendations and conclusions expressed in this report are those of the authors. Statistics NZ and the Ministry of Foreign Affairs and Trade take no responsibility for any omissions or errors in the information contained here. Access to the data used in this study was provided by Statistics NZ in accordance with security and confidentiality provisions of the Statistics Act Only people authorised by the Statistics Act 1975 are allowed to see data about a particular, business or organisation. The results in this paper have been confidentialised to protect individual businesses from identification. The results are based in part on tax data supplied by Inland Revenue to Statistics NZ under the Tax Administration Act This tax data must be used only for statistical purposes, and no individual information is published or disclosed in any other form, or provided back to Inland Revenue for administrative or regulatory purposes. Any person who had access to the unitrecord data has certified that they have been shown, have read and have understood section 81 of the Tax Administration Act 1994, which relates to privacy and confidentiality. Any discussion of data limitations or weaknesses is not related to the data's ability to support Inland Revenue's core operational requirements. Statistics NZ protocols were applied to the data sourced from the New Zealand Customs Service. Any discussion of data limitations is not related to the data's ability to support this government agency s core operational requirements. Any table or other material in this report may be reproduced and published without further licence, provided that it does not purport to be published under government authority and that acknowledgement is made of this source.

3 Abstract Commercial services * are becoming an increasingly important component of world trade. The sector has the potential to play a key role in lifting New Zealand s export and economic performance given the growing demand for internationally traded commercial services and the absence of typical natural resource constraints. Little is known, however, about the characteristics and performance of the commercial services sector in NZ. This paper seeks to fill this knowledge gap by providing a set of stylized facts including size, labour productivity and foreign ownership of firms engaged in commercial services trade, using Statistics New Zealand's prototype Longitudinal Business Database. * Commercial services in this paper excludes travel, transportation, insurance and government services. Refer to Appendix A for an exhaustive list of services covered under commercial services. MINISTRY OF FOREIGN AFFAIRS AND TRADE ECONOMIC DIVISION New Zealand Commercial Service Exporters iii

4 Key Points Commercial services are becoming an increasingly important component of world trade. The sector has the potential to play a key role in lifting New Zealand s export and economic performance given the growing demand for internationally traded commercial services and the absence of typical natural resource constraints. Little is known, however, about the commercial services sector in NZ. Statistics New Zealand s prototype Longitudinal Business Dataset (LBD), which now includes the International Trade in Services and Royalties Survey (ITSS), can help bridge at least part of this knowledge gap. Analysis of the integrated dataset has found the following: Services exporters are more productive than non exporters: similar to merchandise goods exporters, service exporters are larger both in terms of average employees and sales; have higher levels of labour productivity; and are more likely to have some foreign ownership. The better performing firms export both goods and services: firms that export both goods and services are significantly larger and have higher performance levels (sales, value added, and profitability) than firms that export only services and those that only export goods. Despite being smaller in number, firms that export both goods and services account for a majority of services exports. Trade, employment, sales, value added, and profit is concentrated among a few service exporters: among service only exporters, the top 10 percent accounted for: 64.8 percent of total exports; 38.8 percent of all employment; 53.6 percent of value added; and a fifth of all sales. There is a high degree of foreign ownership among the top exporters: out of the 78 firms that represented the top 10 percent of exporters in the service only exporter group, 39 firms (i.e. 50 percent of all firms) had some level of foreign ownership. Similarly, foreign ownership among the top 25 percent of goods and service exporters was 82.6 percent. Service exporters exported to a narrower range of markets: the median goods only exporter exported to three markets compared with just one market for the service only exporters. About 25 percent of all service export receipts were generated by firms exporting to either one or two markets. This contrasts with goods exporters where only 4 percent of all export receipts were generated by firms exporting to either one or two markets. Firms that export several services types or to several markets account for a disproportionate share of exports, employment, sales, value added and profitability. Commercial services in this paper excludes travel, transportation, insurance and government services. Refer to Appendix A for an exhaustive list of services covered under commercial services.

5 Contents 1. Introduction Services Trade Engine of World Growth and a Key Sector in Lifting NZ s Economic Performance Literature Review Data Description Prototype Longitudinal Business Database (LBD) International Trade in Services and Royalties Survey (ITSS) Sample Selection What We Export and Where New Zealand Service Exporters Characteristics Concentration of Activity Product and Market Diversification Number of Service Types, Product Types and Markets Product and Market Concentration Concentration of Activity within Firms Conclusion Bibliography Appendices Appendix A: Service categories in the ITSS Appendix B: Datasets integrated with the LBD Appendix C: Limitations of integrated ITSS data Appendix D: Value of exports and count of firms by service category and destination Appendix E: Description of measures Appendix F: Distribution and coverage of measures MINISTRY OF FOREIGN AFFAIRS AND TRADE ECONOMIC DIVISION New Zealand Commercial Service Exporters v

6 Figures Figure 1: ITSS Identifying commercial service traders and collecting information... 8 Figure 2: Top 20 service export destinations, by count of firms, June 2005 year Figure 3: Top 20 service export destinations, by value of exports, June 2005 year Figure 4: Top 20 service categories, by count of firms, June 2005 year Figure 5: Top 20 service categories, by value of exports, June 2005 year Tables Table 1: Summary statistics Table 2: Characteristics of non exporters, goods exporters, service exporters and goods and service exporters Table 3: Performance of non exporters, goods exporters, service exporters and goods and service exporters Table 4: Total export receipts by type of exporter Table 5: Concentration of activity within each group of exporters Table 6: Diversity of export portfolios Table 7: Concentration of activity by number of services/goods exported Table 8: Concentration of activity by count of export destinations Table 9: Concentration of activity by primary service/goods type Table 10: Concentration of activity by primary export market Table 11: Distribution of key measures by type of activity Table 12: Coverage of firms across performance measures Table 13: Coverage of firms across performance measures by number of services/goods exported Table 14: Coverage of firms across performance measures by number of service/goods destinations... 44

7 1. Introduction Rapid technological progress, especially in the information and communication technology (ICT) sector, coupled with global trade liberalisation, has resulted in a world wide surge in commercial services businesses. 1 Earlier classified as non tradables, commercial services are now gaining an increasing share of world trade. Prominent examples of commercial services include construction and related engineering services, accounting, legal, management and consultancy services. In New Zealand (NZ), the services sector dominates the domestic economic landscape and accounts for over 70 percent of registered businesses, national output and employment. 2 Services are also a significant source of export revenue for the country. In 2009, NZ services exports were valued at $12.7 billion and represented 22 percent of all exports. 3 Among service exports, travel and transportation dominated with a 77 percent share. The remaining 23 percent was accounted for by commercial services. The commercial services sector is expected to play a key role in lifting NZ s economic performance and exports given the growing global demand for expertise and specialised services and the lack of typical natural resource constraints (i.e. land availability and environmental pressures). However, little is known about the characteristics and performance of the commercial services sector in NZ. There are very few published statistics on bilateral and regional trade in services, performance of service exporters, and types of services exported and imported. From a trade policy perspective, the lack of knowledge makes it difficult to: identify issues that really matter to commercial service exporters; advance the interests service exporters during trade negotiations and in policy formulation; and evaluate the impacts accruing from increased liberalisation of services trade. This is in contrast to the existing knowledge on merchandise goods exports sector. Research programmes undertaken by Fabling and Sanderson have provided extensive documentation on NZ merchandise exports. Specifically, in the context of merchandise exports they have found that exporters are larger and more productive than firms with a purely domestic orientation (Fabling and Sanderson, 2009b). They also observe that productive firms self select to exporting (Fabling and Sanderson, 2009b) and that much of the export business is concentrated among a small 1 Commercial services in this paper excludes travel, transportation, insurance and government services. Refer to Appendix A for an exhaustive list of services covered under commercial services. 2 Business Demography Statistics: as at Feb 2009; Gross Domestic Product Statistics: December 2009 quarter; Linked Employer Employee Data: March 2008 year. Statistics New Zealand. 3 Balance of Payments and International Investment Position: Year ended 31 st March Statistics New Zealand MINISTRY OF FOREIGN AFFAIRS AND TRADE ECONOMIC DIVISION 1 New Zealand Commercial Service Exporters

8 proportion of exporting firms (Fabling and Sanderson, 2008). This paper adds to this knowledge base by providing evidence on commercial services exporters. This paper, the first in a series, provides a set of stylized facts for firms engaging in commercial services trade, using Statistics New Zealand s prototype Longitudinal Business Database. The paper considers the characteristics and performance of service exporters and the concentration of activity between firms and how this compares with merchandise goods exporters. The paper is structured as follows: Section two discusses the importance of services trade and identifies the barriers that have prevented us from obtaining a better understanding of this sector; Section three provides a summary of existing literature on exporting and firm performance; Section four describes the dataset used in the analysis; Section five provides a summary of our key services exports and markets; Section six establishes a set of stylized facts that characterise service exporters; Section seven analyses service type and market diversification and investigates the concentration of activity by the number of service categories and markets a firm exports to; and The final section concludes and outlines areas for future research. 2. Services Trade Engine of World Growth and a Key Sector in Lifting NZ s Economic Performance Services trade has been recognised as the engine of world growth (Hufbauer and Stephenson, 2007). Since the 1980s, global services trade has been growing more rapidly than production and merchandise trade (Lamy, 2009). And unlike the manufacturing sector, it was largely unaffected by the global economic recession (Borchert and Mattoo, 2009). Global demand for specialised service inputs is likely to rise further as global production networks are increasingly organised at the task level (also referred to as trade in tasks). 4 NZ is well placed to capitalise on the 4 Trade in tasks captures the disaggregation of the value chain into a large number of relatively small tasks or discrete steps, which could include development or design of some aspect of the product, software development, and production of components, package design, or logistics.

9 demand for internationally traded non routine tasks (as opposed to tasks that are routine and where the information is codifiable, this category of service inputs or tasks are more easily off shored or outsourced) given its relatively well educated workforce (OECD, 2009); 5 international recognition for its skills, knowledge and innovativeness (MED, 2003); 6 and access to advanced computing and telecommunications technology (Weforum, 2009). 7 The lack of typical natural resource constraints (i.e. land availability and environmental pressures) in the provision of commercial services also provides vast opportunities for growth. This is in contrast to the natural resource based industries, which dominate NZ s merchandise goods exports, where exports are limited to what can be sustainably grown. The Government s Economic Growth Agenda recognises NZ s potential in commercial services and has identified the services sector (particularly commercial services) as a key contributor to lifting NZ s economic performance. The limited information on the commercial service exporters has been an impediment in better understanding and advancing the needs of these exporters. However, the integration of the International Trade in Services and Royalties (ITSS) data with the prototype Longitudinal Business Database (LBD) offers new opportunities. 3. Literature Review Numerous empirical studies have analysed exporter performance. However, the focus of these studies has almost always been merchandise goods exporters. Some of the key results of these studies from NZ are summarised below. Fabling and Sanderson (2008) in their paper Firm level patterns in Merchandise trade found that: export value is highly concentrated among a small proportion of exporting firms; the majority of aggregate export growth comes from existing productmarket relationships; 5 The OECD Education at a Glance Report (2009) ranks New Zealand above Australia, the UK and the OECD average, for the proportion of the population who hold a tertiary qualification. 6 The MED Growth and Innovation Framework Benchmark Indicators Report (2003) compares the rate of innovation of NZ manufacturing and services sectors with their European counterparts. Innovativeness is measured as the proportion of firms with new products (goods or services). The comparison suggested that NZ businesses are at least as, if not more, innovative than their EU counterparts. 7 New Zealand ranks 19 out of 133 countries or (19th out of the 46 high income countries) in the World Economic Forum Networked Readiness Index. The index identifies the enabling factors for countries to fully benefit from ICT. Enabling factors include the political and regulatory environment; infrastructure; individual and business readiness in terms of capability to absorb new technology and availability of technology; and usage of ICT amongst households, businesses and government. MINISTRY OF FOREIGN AFFAIRS AND TRADE ECONOMIC DIVISION 3 New Zealand Commercial Service Exporters

10 exporting spells tend to be short, with over half of all firm level export relationships (firm, product, and market combination) ending after a single year; and firms that maintain an ongoing export presence often do so while switching between products and markets. The paper Export market choice for New Zealand firms (Fabling, Grimes and Sanderson, 2008) investigated what determines a firm s ability to export; and given a firm s ability to export, what determines the choices they make about what to export and where to. Some of the key results included: a firm is more likely to introduce a new product to a market where they have an established trade relationship, i.e. sunk costs are an important determinant of export market entry; firms generally choose to expand exporting by introducing their existing successful products to new geographical markets; and population, openness, and foreign incomes are some of the determining factors that influence entry into a new market. However, the relative influence of these factors differs across product types. A further paper, Entrepreneurship and aggregate merchandise trade growth in NZ (Fabling and Sanderson, 2009a) found the following: much of the growth in merchandise goods exporting came from the firm level decision to innovate, either by becoming an exporter for the first time or expanding into trade relationships associated with varying degrees of novelty; a large proportion of expansion among incumbent firms came from introducing new goods to current trade partners, i.e. leveraging off existing market knowledge and networks; and eighty percent of the trade relationship (product country) relationships came to an end after the first year, suggesting a considerable degree of short term exporting. 8 Investigations into Exporting and Firm Performance: the impact of destination characteristics on learning effects (Fabling and Sanderson 2009b) found that: more productive firms self select into exporting; and there was little evidence to suggest learning by exporting. 8 Fabling and Sanderson (2009a) attribute the high degree of short term exporting to one of exporters taking advantage of specific market opportunities (such as a low exchange rate or a fortuitous offshore order); or alternatively unsuccessful attempts to break into a market after encountering barriers.

11 Exporter Performance in the German Business Services Sector: First evidence from the services statistics panel (Vogel, 2009) is one of the few papers that attempts to level our understanding of service exporters with that of merchandise goods exporters. The paper finds evidence to suggest that: similar to the manufacturing sector, German business service enterprises that export are larger, more productive, and pay higher average wages than non exporting firms; large enterprises self select into export markets; and evidence of learning by exporting was inconclusive (this may be because of the short time period of the data). Service Traders in the UK (Breinlich and Criscuolo, 2008) is another paper that focuses on service exporters and importers. The paper drew the following conclusions: services trade is concentrated in a small number of sectors and the bulk of the trade is carried out by a small fraction of firms within these sectors; service traders are bigger, more productive, and more likely to be foreign owned or part of a multinational enterprise; most firms just trade with a small number of countries and in a single service type; however, the small group of firms that trade with many countries or in many service types account for a disproportionate share of total exports, employment, sales, and value added; and trade is also concentrated within firms, in that a firm exporting more than one type of service, or exporting to more than one country, continues to receive most of its export receipts from a single service type or from a single market. Breinlich and Criscuolo s novel paper uses firm level data. In our analysis of New Zealand service exporters, we draw on some of the techniques used by Breinlich and Criscuolo. 4. Data Description 4.1 Prototype Longitudinal Business Database (LBD) Firm level analysis of service exporters is enabled by Statistics NZ s prototype Longitudinal Business Database (LBD). The LBD contains enterprise level data for financial years At the heart of the LBD is the Longitudinal Business Frame (LBF). The LBF contains longitudinally linked data for most enterprises operating in NZ. The LBF 9 An enterprise is defined as a service entity operating in NZ. MINISTRY OF FOREIGN AFFAIRS AND TRADE ECONOMIC DIVISION 5 New Zealand Commercial Service Exporters

12 contains data on key enterprise level characteristics such as industry, location, employment, and ownership details including the relationship of an enterprise to a parent or subsidiary enterprise. Most enterprises operate independently, but a small proportion of this population are part of a group structure sharing a common group topenterprise (GTE) with other enterprises i.e. have a parent subsidiary relationship. Despite being small in number, groups account for a substantial proportion of total employment and value added (Fabling and Sanderson, 2008). Integrated to the LBF are various administrative datasets and survey data. 10 The most recent addition funded by MFAT, is the ITSS. The ITSS collects information on NZ s trade in commercial services. The integration paves the way for firm level analysis of service exporters similar to that of merchandise goods exporters International Trade in Services and Royalties Survey (ITSS) The ITSS collects information on commercial services trade (imports and exports) by country and service category for the compilation of Balance of Payments Statistics and National Gross Domestic Product. 12 The survey is carried out on a quarterly basis and a census of service traders is carried out approximately once every five years. An ad hoc ITSS Birth Survey is sent out to all newly identified service traders, identified from either the media or from the Annual Frame Update Survey. 13 The population of service traders is identified from the Annual Frame Update Survey (AFUS), which is primarily used to update the Business Frame. The survey is targeted at all economically significant firms and enterprises with multiple geographic locations. Firms below the economic significance threshold are not surveyed and therefore, the service traders identified by Statistics NZ generally excludes enterprises below the AFUS threshold. 14 The survey is sent out to all tier one firms on an annual basis, and tier two firms on a triennial basis. 15 The survey identifies firms as service traders (exporters and importers) if they paid or received transactions totalling 10 Administrative datasets integrated to the LBF include GST returns; financial accounts (IR10); company tax returns (IR4); PAYE returns; and shipment level merchandise trade data. Survey data integrated to the LBF include Annual Enterprise Survey; Business Operations Survey; Manufacturing and Energy Use Survey; Business Finance Survey; and Research and Development Survey. 11 For more information on the prototype Longitudinal Business Database refer to R Fabling A rough guide to New Zealand s prototype Longitudinal Business Database. 12 Travel, transportation, insurance and government services are not covered in the ITSS survey. For a list of the service categories covered in the ITSS see Appendix A. 13 The last ITSS Birth Survey was sent out in The AFUS threshold cannot be disclosed for confidentiality reasons. 15 The Business Frame groups firms into three tiers. Tier one firms are economically significant firms. Tier two firms are moderately significant and tier 3 firms are not significant.

13 $20,000 or more per annum from commercial activity 16 with any overseas located business. 17 In addition to the AFUS, business and news media and official industry sources are used to identify service traders. The census is sent out to all identified service traders. The 2005 ITSS census was directed at approximately 4,000 NZ businesses and the response rate was 89 percent. Of all enterprises surveyed: 54.3 percent responded with data, i.e. the enterprises had some international service and royalty transactions for the reference period; and 34.7 percent reported no data, i.e. did not have any international service and royalty transactions. Those who responded to the ITSS census then become the base population from which a sample is selected for the ITSS quarterly survey. The quarterly survey is comprised of all firms that collectively make up 95 percent of exports in a particular service category. The quarterly survey also includes new firms that are identified, for example through the media, as engaging in services exports. Approximately 1000 questionnaires are sent out for the quarterly surveys. Statistics NZ ensures a 100 percent response rate for key firms and 80 percent response rate for all other firms. 18 In instances where the enterprise is in a group structure, the GTE would initially be sent the survey form and asked to complete the response on behalf of the group. Subsidiaries that the GTE is not reporting on behalf of, but are in the population, are sent their own survey form. The ITSS census is available in the LBD for years 1999 and 2005 and the quarterly surveys are available from 1996 to The different components of the ITSS data integrated with the LBD are further discussed in Appendix B. 16 Commercial activity includes: consultancy, management or computer services; brokering or other financial services; professional, technical or engineering services; equipment leasing, agency services; and fees received from or paid for outsourcing services activity with offshore parties. 17 AFUS has a response rate of 84 percent. Non response will result in service traders not being picked up by the survey and may also result in firms that have since stopped exporting/importing services continued to be identified as service traders. Additionally, with the tier two firms being surveyed once in every three years, firms that have ceased to export will be shown to be exporting continuously for three years before the service trading status is revised. See Appendix C for some of the data limitations. 18 Key firms are those considered important to the survey for a variety of reasons, usually because they are big and have a significant effect on the estimates. 19 The service trader indicator from the Business Frame is also scheduled to be integrated with the LBD to enable industry level analysis. MINISTRY OF FOREIGN AFFAIRS AND TRADE ECONOMIC DIVISION 7 New Zealand Commercial Service Exporters

14 Figure 1: ITSS Identifying commercial service traders and collecting information AFUS The AFUS identifies service traders (exporters and importers) with trade greater than or equal to $20,000. ITSS Census The ITSS census is sent to all identified service traders. In 2005, the ITSS census was sent to approximately 4000 firms. The 2005 census had a response rate of 89 percent. Of those enterprises who responded 54.3 percent responded with data. Sampling frame for the quarterly survey Firms who responded to the ITSS census together with service traders identified via media and other Statistics NZ surveys become the base population from which a sample is selected for the quarterly survey. ITSS quarterly survey The quarterly survey is comprised of all firms that make up 95 percent of a particular service category. The quarterly survey is sent to approximately 1000 firms. The response rate is 100 percent for key firms and around 80 percent for all other firms. As with any survey, there is some uncertainty with regard to the accuracy of the answers, exhaustiveness of the list of services on which information is obtained, and the clarity of the concepts/definitions in the survey. However, Statistics NZ addresses this uncertainty by carrying out cognitive tests before a survey is released into the field to educate the industry on the concepts and definitions and by following up with the respondent when the response is unclear or unexpected. 20 Given the survey nature of the services trade statistics, the types of questions that can be asked of the data are very different to the types of questions that can be asked of merchandise trade data. Merchandise trade data in the LBD is based on administrative data where all exports/imports greater than $1,000 are captured. Services trade data on the other hand is only available for identified service exporters who have responded to the ITSS survey so the analysis is influenced by the way in which the population is identified and the survey response. For more discussion on some of the limitations of the integrated ITSS data in analysing service exporters refer to Appendix C. 20 Fabling, Grimes and Stevens (2008), in their comparison of self reported firm performance measures in the Business Operations Survey against measures taken from administrative sources, found that there was much commonality between the two data sources. This result provides some assurance on the accuracy of survey responses.

15 4.3 Sample Selection The ITSS census is the most comprehensive source of information on NZ s services trade (exports and imports) with the rest of the world and the most recent ITSS census relates to the 2005 June year. 21 To build a better initial understanding of service exporters and investigate how they compare with other firms, we therefore restrict our analysis to firms in operation in the 2005 year. Service exporters are identified in the LBD if they had a non zero response to the 2005 ITSS Census. 22 Likewise, merchandise goods exporters are identified if they had a positive export value during the time period under consideration. The identification of service and goods exporters allows us to categorise firms as service only exporters, goods only exporters, service and goods exporters, and non exporters. Non exporters are firms that were not observed to be engaging in any good or services exports. However, these firms could include genuine service exporters who have not been identified as service exporters or those who have not responded to the ITSS survey. To allow for comparisons to be made between non exporters and merchandise goods exporters, the set of conditions that qualifies a firm to be a candidate for the ITSS survey are applied across all firms. ITSS candidates are in turn identified in the AFUS survey if the respondent indicates they export/import services greater than $20,000 per annum. Given this, the set of conditions that qualify a firm to be a candidate for the AFUS survey are applied across all firms and additionally, a filter of exports greater than $20,000 per annum is applied to merchandise goods exports so that the population is broadly comparable with those who receive the ITSS questionnaire. The sample is further restricted to private for profit firms. This excludes households, firms operating in the public administration and safety industry classification, and firms located offshore. Additionally, only economically active firms in 2005 with an industry classification are considered in the analysis. 23 To account for the group filing of ITSS forms and also merchandise goods exports, all the data are aggregated to the group level. In order to make the distinction clear from here on we will distinguish between firms and enterprises. A firm will refer to both independent enterprises (firms that 21 The next ITSS Census is scheduled to take place in 2011 with results being made available late Businesses which reported zero exports/import in the survey or census cannot be indentified. These firms will instead appear as non service exporters during the particular year/quarter. note these firms might be genuine exporters but with zero exports for the year under consideration. 23 Economically active enterprise are defined as enterprises that meet at least one of the following criteria in a particular year: Linked Employer Employee Data (LEED) rolling mean employment (RME) greater than zero GST sales greater than zero GST purchases greater than zero IR10 total income greater than zero IR10 total expenditure greater than zero IR10 total fixed assets greater than zero. (Fabling, Grimes, Sanderson and Stevens, 2008) MINISTRY OF FOREIGN AFFAIRS AND TRADE ECONOMIC DIVISION 9 New Zealand Commercial Service Exporters

16 don t belong to a group) and aggregate group enterprises i.e. enterprises with a parent subsidiary relationship. Table 1 summaries the count of firms considered in the analysis, by type of activity. 24 Table 1: Summary statistics Type of Activity Number of Firms Non exporter 143,760 Goods only exporter 5,037 Service only exporter 780 Goods and service exporter 282 Total 149,859 Notes: (1) Firm counts have been randomly rounded. Source: Authors calculation 5. What We Export and Where Of key interest from a trade negotiation and trade policy perspective are insights into: the markets we export to; the types of commercial services we export; and the firms engaging in services trade. Figures 2 and 3 summarise our top 20 export markets by the number of firms exporting to that market and also by the value of exports respectively The discrepancy between the total response rate for the ITSS Census (i.e. 54 percent out of the 4000 firms that were sent the questionnaire) and the reported number of service exporters 1062 can be explained by importing firms that are also part of the population, and enterprises that fill out the survey independently but belong to the same group. 25 Countries have been aggregated in some cases to preserve the confidentiality of firms. A firm will be counted multiple times if it exports to multiple markets. Additionally, firm counts have been randomly rounded.

17 Figure 2: Top 20 service export destinations, by count of firms, June 2005 year Australia 696 US 390 United Kingdom 282 China 150 Country Singapore Fiji Japan Canada Other Germany Malaysia France South Africa Thailand Netherlands GCC Sw itzerland Other Polynesia Indonesia Samoa Count of Firms Notes: Source: The Gulf Cooperation Council (GCC) group of countries includes Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates (UAE). The Other category includes firms exporting to Antarctica, Bermuda, North Korea, Norfolk Island, an unspecified country and to an unknown destination. Authors calculation In 2005, Australia was by far the biggest export destination, both in terms of the count of firms involved and by the value of services exported. Around 65 percent, or 696 of the 1062 service exporters in our sample, exported their services to Australia. By value of exports, Australia accounted for 28.8 percent of our total services exports in The US and the UK were the second and third most important service export destinations by firm count, with 390 and 282 firms exporting to these markets respectively in MINISTRY OF FOREIGN AFFAIRS AND TRADE ECONOMIC DIVISION 11 New Zealand Commercial Service Exporters

18 Figure 3: Top 20 service export destinations, by value of exports, June 2005 year Australia 759 US 496 China 215 Other Japan 200 Korea United Kingdom 136 Singapore 37 GCC Country Taiwan Fiji Malaysia Canada Indonesia Germany Other Polynesia Other Middle East and North Africa Ireland Papua New Guinea Other South Asia $ Millions Notes: Source: NZ services export to South Korea, Taiwan, GCC and the Other country grouping has been suppressed for confidentiality reasons. Authors calculation By value of service exports, the US and China (includes Hong Kong and Macau) were the second and third biggest export destinations, accounting for 18.8 percent and 8.1 percent of total exports in 2005 respectively. Collectively Australia, US, and China account for over half (55.8 percent) of NZ s services exports. For more information on NZ s services export by export destination, see Appendix 3. Figures 4 and 5 provide insights into the composition of our commercial services trade in Figure 4 summarises our services exports by count of firms and Figure 5 summarises our services exports by value of trade Service categories have been aggregated to preserve the confidentially of firms, and firm counts have been randomly rounded.

19 Figure 4: Top 20 service categories, by count of firms, June 2005 year Service Type Count of firms Source: Authors calculation Key 1 Management consultancy services, Property management services, Postal and courier services 2 IT design and development services 3 IT technical consulting and support services 4 Management fees between you and any foreign parent or subsidiary 5 Roytalies and license fees received for computer services 6 Other Miscellaneous Services, Maintenance and Repairs of computers & peripheral equipment 7 Commission agent services for trade in goods 8 Engineering consultancy services 9 Public performance royalties for musical works and/or sound recordings, Other royalty payments for musical works and/or sound recordings, Revenue/payments from franchise rights, Other royalty payments received/made, Sale/payments of intangible assets 10 Advertising and market research 11 Other telecommunication services, News agency services provision of news, photographs and feature articles 12 Technical, testing and analytical services 13 Research and development services 14 Merchanting or any trade related service 15 Hosting and IT infrastructure provisioning services 16 Education services 17 Audio visual and related services 18 Construction and installation services 19 Accounting, tax, and auditing services 20 Legal services MINISTRY OF FOREIGN AFFAIRS AND TRADE ECONOMIC DIVISION 13 New Zealand Commercial Service Exporters

20 Figure 5: Top 20 service categories, by value of exports, June 2005 year Service Type $NZ Millions Source: Authors calculation Key 1 Merchanting or any trade related service 2 Other telecommunication services, News agency services provision of news, photographs and feature articles 3 IT design and development services 4 Management consultancy services, Property management services, Postal and courier services 5 Legal services 6 Management fees between you and any foreign parent or subsidiary 7 Engineering consultancy services 8 Performance and Sport 9 Commission agent services for trade in goods 10 Construction and installation services 11 Other Miscellaneous Services, Maintenance and Repairs of computers & peripheral equipment 12 Advertising and market research 13 IT technical consulting and support services 14 Repair or refurbishing services 15 Public performance royalties for musical works and/or sound recordings, Other royalty payments for musical works and/or sound recordings, Revenue/payments from franchise rights, Other royalty payments received/made, Sale/payments of intangible assets 16 Roytalies and license fees received for computer services 17 Audio visual and related services 18 Accounting, tax, and auditing services 19 Other financial services 20 Research and development services

21 By count of firms, the top three service groupings included: Management consultancy services, Property management services, Postal and courier services; IT design and development services; and IT technical consulting and support services. The three groupings each accounted for over a tenth of all service exporters. Merchanting or any trade related services was by far the biggest services export by value, accounting for 30.5 percent ($805 million) of total commercial services export receipts. Merchanting captures the purchase of a good by a New Zealand resident from a non resident and the subsequent resale of the good to another non resident; during the process, the good does not enter or leave New Zealand. The difference between the value of goods when acquired and the value when sold is recorded as the merchanting service provided. Other telecommunication services and news agency services (9.5 percent of total services exports or $251 million) and IT design and development services (5.0 percent of total services exports or $132 million) were the second and third biggest services export by value. 27 For a breakdown of the types of services exported by service only exporters and goods and services exporters, see Appendix New Zealand Service Exporters 6.1 Characteristics Having investigated the what and where of our services exports in 2005, the next line of enquiry is the comparative performance of services exporters i.e. how service exporters compare to merchandise goods exporters and non exporters, and their contribution to economic activity. Firm level characteristics and performance measures of non exporters, service only exporters, goods only exporters, and goods and service exporters are summarised in Tables 2 and Both the average and median measures are reported. The difference in magnitude between the two measures of centrality highlights the asymmetry in distribution (i.e. presence of outliers) within these groups of firms. The relative ranking of the different groups of firms across the different measures is mostly consistent across both the median and average values. 27 News agency services include the provision of news, photographs and feature articles. 28 The sales, value added and profitability measures are not available for all firms in our sample. The averages/medians are based on the observations for which data is available as opposed to an average/median across all firms in the sample. The coverage rate of the various performance measures (sales, value added, profit, value added per employee, and profit per employee) across the various data sources is reported in Table 12 Appendix F. As can be seen the coverage is fairly good at between 100 and 70.4 percent and therefore reasonably high levels of confidence can be placed on the measures of centrality i.e. averages and medians. See Appendix D for description of measures considered. MINISTRY OF FOREIGN AFFAIRS AND TRADE ECONOMIC DIVISION 15 New Zealand Commercial Service Exporters

22 Table 2: Characteristics of non exporters, goods exporters, service exporters and goods and service exporters Type of activity Number of Firms Number of Employees Average Number of Employees Median Proportion of Firms with Foreign Ownership (%) Non exporter 143, Goods only exporter 5, Service only exporter Goods and service exporter Total 149, Notes: (1) Firm counts have been randomly rounded. Source: Authors calculation Table 3: Performance of non exporters, goods exporters, service exporters and goods and service exporters Type of activity Sales Value Added Profit Value Added per Employee Profit per Employee Average Non exporter Goods only exporter Service only exporter Goods and service exporter Total Non exporter Goods only exporter Service only exporter Goods and service exporter Total 1,190, , ,400 74,000 32,900 17,409,600 4,856,400 1,524, ,800 37,200 12,865,700 5,140,000 2,334, ,000 88, ,549, ,717,200 36,479, ,600 86,600 2,376, , ,500 77,500 33,500 Median 408, ,600 30,000 40,000 9,100 2,758, , ,300 60,500 12,200 1,229, , ,400 85,300 17,400 21,050,000 6,930,500 1,285,500 86,900 20, , ,000 31,000 40,900 9,200 Source: Authors calculation In our sample of 1062 service exporters, 780 were engaged in the export of services only while 282 were engaged in the export of goods and services. A larger number of firms (5037) were goods only exporters and the majority of firms (95.9 percent of firms in sample) were non exporters firms with no observed goods/services export receipts.

23 A number of interesting differences are evident when comparing nonexporters and service only exporters. Service only exporters are: larger both in terms of the number of employees and sales; have a higher proportion of firms with some foreign ownership (28.1 percent vs. 1.7 percent); have higher levels of profit and value added; and higher levels of labour productivity (measured by value added per employee). 29 These results are largely consistent with research on merchandise goods exporters. 30 Both merchandise goods exporters and service exporters have higher levels of profit relative to firms that do not export. This suggests that despite the additional costs incurred in exporting to foreign markets i.e. market research, adaptation of products and services to local regulations, transport costs etc, the increase in revenue streams more than offsets the additional costs. Goods only exporters and service only exporters appear to be the most similar across a number of measures, out of the four groups of firms considered. 31 A notable difference includes the relatively higher sales amongst goods only exporters (average sales of 17.4 million vs million). This could be due to the administrative nature of the GST dataset. For example goods exporters are more likely to file GST returns since GST is payable on most goods; on the other hand, some services are exempt from GST, for example financial guarantees and commitments. These activities do not appear in the GST sales figure and so this underestimates total sales. The higher labour productivity measure among service only exporters is another point of difference between the two groups of exporters. The firms that export both goods and services are markedly different from all other groups of firms. These firms are considerably bigger in terms of employment and sales and more than half of all firms in the group have some foreign ownership. Goods and service exporters also have higher levels of value added and profit. Median value added and profit per employee are higher for this group of firms, however average value added and profit per employee are slightly lower than that of service only exporters. Despite being small in number (0.2 percent of all firms), goods and service exporters account for a disproportionate share of total employment (15 percent), sales (24 percent), and value added (27.8 percent). 32 The considerable contribution of this group of firms is also reflected in the total export receipts in our sample. Table 4 summarises the total export receipts received by the different groups of exporters in the 2005 year. 29 Labour productivity, a measure of how efficiently labour is used, is influenced by a number of factors including the level of capital, knowledge and skill of employees; and management practices. These factors are likely to be different across the groups of firms considered. Controlling for these factors in our estimation of labour productivity would allow us to better evaluate the extent of the productivity differentials between the different groups of firms. This will be an area of future work. 30 Bernard and Jensen (1995); Fabling, Sanderson and Stevens (2009b). 31 It is of interest to test the equality of means for the two groups of exporters across the measures considered. We will look to include this when we update the paper. 32 Refer to table 11 in Appendix F. MINISTRY OF FOREIGN AFFAIRS AND TRADE ECONOMIC DIVISION 17 New Zealand Commercial Service Exporters

24 Close to forty percent of all export receipts in the 2005 year, as captured by the customs data (goods exports) and ITSS data (services exports), were from firms that exported both goods and services. The majority (82 percent) of export earnings received by these firms was from the export of goods. Despite there being nearly three times as many service only exporters as goods and services exporters, the total export receipts received by this small group of firms for services exports ($1,911 million) exceeded the total export receipts received by service only exporters ($713 million). This means that the majority of NZ s commercial services exports in 2005 were from a small number of firms that were engaged in the export of both goods and services. However, the services share of total exports, within this group of firms, still pales in comparison to goods exports (i.e. 18 percent, vs. 82 percent). Table 4: Total export receipts by type of exporter Type of exporter Number of Firms Total Goods Exports Total Services Exports Total Exports Actual $ Goods only exporter 5,037 15,925,465, ,925,465,349 Service only exporter ,220, ,220,700 Goods and service exporter 282 8,573,700,219 1,911,417,008 10,485,117,227 Total 6,099 24,499,165,568 2,624,637,708 27,123,803,276 % of Total Exports Goods only exporter Service only exporter Goods and service exporter Total Notes: (1) The total export value in the above table does equate to export receipts as reported in the Balance of Payments given the various restrictions and exclusions (e.g. exclusion of travel and transportation services). Source: Authors calculation 6.2 Concentration of Activity It was apparent in the previous section that firms that exported both goods and services accounted for a disproportionate share of export receipts. In this section we investigate the concentration of activity within the different exporter groups. Table 5 reports on the share of economic activity of the top 10, 25, 50, 75, and 90 percent of exporters in terms of the total export value by exporter type. Consistent with research on merchandise goods exports (Fabling and Sanderson, 2008) there is a concentration of trade, employment, sales, value added, and profit among a few service only exporters. For example, the top 10 percent of service only exporters by export value in 2005 accounted for: 64.8 percent of services exports; 38.8 percent of employment; a fifth of all sales; 53.6 percent of total value added; and 64.8 percent of total profit. The top 50 percent of the firms accounted for most